Democrats Have Baked Harmful Incentives Into Student Loans

It should come as no surprise that college graduates are no dummies. If you tell us we can take out an unlimited amount of subsidized student loans, that our monthly payments will be capped (based on our level of income), and that our loans will be forgiven in 10 years, that’s a recipe for free-ish money. We essentially get to pursue the most expensive college experience while also feeling no pressure to find a job that justifies the expense.

Unsurprisingly, as the Wall Street Journal reports, more and more people are taking advantage of this incredibly backwards incentive structure:

Virginia Murphy borrowed a small fortune to attend law school and pursue her dream of becoming a public defender. Now the Florida resident is among an expanding breed of American borrower: those who owe at least $100,000 in student debt but have no expectation of paying it back.

Ms. Murphy pays just $330 a month—less than the interest on her $256,000 balance—under a federal income-based repayment program that has become one of the nation’s fastest-growing entitlements. She plans to use another federal program to have her balance forgiven in about seven years, a sum set to swell by then to $300,000.

The promise of forgiveness is “the only reason I would have ever considered” amassing so much debt to attend Tulane University Law School, says Ms. Murphy, 45 years old. She earns $56,500 a year as an assistant public defender in West Palm Beach.

This is more than just a one-off anecdote, it’s a brewing crisis. Just take a look at some of these alarming statistics courtesy of the Journal article:

    • Student loan debt has doubled since the recession and totals $1.19 trillion.
    • 40% of all student debt is held by postgraduate borrowers, who account for only 14% of students in higher education.
    • The number of Americans who owe at least $100,000 in student loans increased by more than 500% in the last ten years.

To be clear, an income based repayment system makes absolute sense. Given the societal and economic benefits of an educated populace, it’s sensible to devolve some of the risk away from prospective students, who may fear a lifetime of unsustainable debt payments more than they prize a four-year degree. But by adding loan forgiveness in the mix we’ve changed the game in a way that doesn’t always benefit students.

While college graduates are no doubt smart enough to figure out how to capture a public subsidy, so too are college administrators. As former secretary of education William Bennet famously said, “Increases in financial aid  . . . have enabled colleges and universities blithely to raise their tuitions, confident that federal loan subsidies would help cushion the increase.”

In other words, colleges see the benefit accruing to student and have worked feverishly to gobble it up for themselves by building ever-fancier amenities and spiking their tuition prices.

As Charles Lane writes for the Washington Post, law schools have been especially reckless:

Nowhere has Grad PLUS had a greater impact than in the nation’s law schools. Law-student indebtedness grew from an average of $66,000 for public institutions in the 2005 academic year to $88,000 in 2012, according to a recent American Bar Association (ABA) task force report. The figures for private law schools were $102,000 in 2005 and $127,000 in 2012. More than half of law students use Grad PLUS.

Then demand for lawyers collapsed, because of the “Great Recession” and structural changes in big-firm practice. Only about 60 percent of the Class of 2013’s law degrees landed immediate employment. The value of a law degree has plunged, and with it, law school enrollment.

The logical response would be a full-scale restructuring of legal academia, including pay trims or layoffs for the lawyers who teach and administer law schools, and whose salaries, generally well above the median national income, account for about a third of law-school overhead, according to the ABA.

Instead, the flow of easy taxpayer-backed loan money through Grad PLUS operated as a de facto bailout, enabling many law schools to maintain capacity and delay reforms, or settle for modest ones, while continuing to charge more or less the same high tuition.

Fortunately, some in Washington are taking a good hard look at ways to fix the problem. For instance, Republican Senator Lamar Alexander of Tennessee and Democrat Cory Booker of New Jersey, have filed legislation to cap the amount of subsidized student loans that can be taken out. But Bloomberg reports that, “Colleges, whose lobbyists and trade associations have succeeded in defeating just about every attempt to control rising tuition costs over the last decade, are trying to soften Alexander’s proposed law. . .”

It sounds like if students are looking for a good place to start pushing their colleges to cut costs, they could look to their lobbying budgets.